While the 37-year-old celebrated the 89th victory of his incredible career, serenaded by air-horns and his jubilant army of red-shirted fans, Renault's world champion Fernando Alonso limped home fifth.
The Spaniard's overall lead was slashed from 17 points to 11, leaving his championship hopes on a knife-edge with six races remaining.
Schumacher, in what some fear could be his final race appearance in Germany, took the lead after 10 laps when McLaren's Kimi Raikkonen pitted and the rest was straightforward.
On a blazingly hot afternoon in southern Germany, Schumacher and Brazilian team mate Felipe Massa were in a race of their own as they anchored the team's second one-two finish in three starts and tyre partner Bridgestone's 100th grand prix success.
They crossed the line in close formation, just 0.7 seconds apart. Raikkonen, who had started on pole, was out of sight in third place and 13.2 seconds behind.
Briton Jenson Button was fourth for Honda, ending a run of five races without points.
Alonso, who had qualified a disappointing seventh on his 25th birthday, made up two places at the start but then faded and was never in contention for the second race in a row.
The Spaniard, who now has 100 points, would have been staring at his worst result in almost a year had Australian Mark Webber, wrestling every scrap of performance from his Williams, not retired eight laps from the finish while running ahead of him.
Alonso also survived a big scare five laps from the end when he went wide, the car bucking and jumping over the gravel before he regained the track just in front of Italian team mate Giancarlo Fisichella.
Fisichella finished sixth, with Toyota's Italian Jarno Trulli seventh and Austrian Christian Klien taking the final point for Red Bull.
Germany's Nico Rosberg failed to get past the first lap, crashing into the tyre wall, while Canadian Jacques Villeneuve also had a crash in the BMW Sauber.
